Business and development – the language of upgrading

The vocabularies that the business and development communities use to describe improvements to supply and distribution chains are rather divergent, as are the concepts behind them. For instance, supply chain managers focus on ‘optimisation’ and their approach is highly technical, based upon streamlining in logistics and inventory and supported by complex and rapidly innovating IT solutions. Suppliers are viewed as presenting risks to be managed and costs to be controlled.

In contrast, when development practitioners refer to ‘upgrading’ they are generally thinking in terms of securing a greater share of value for suppliers (producers). More recently, the concept has broadened to include the improvement of social and environmental performance of chains, most notably perhaps in reducing the environmental impact of agricultural activities and in improving the way that women benefit from their participation. Suppliers tend to be the main focus and buyers are often perceived as presenting threats and challenges to be mitigated or even eliminated.

Georgina Turner’s recent report and blog on the Microventures project in Malawi is a practical example of trying to combine a business approach and development approach; helping farmers upgrade by working with players in the value chain. But usually, the two parties are talking different languages and approaching issues from diverse standpoints.

So, is there any scope for mutual understanding and collaboration? I would argue that the answer is a resounding ‘yes’! In a recently published book, Jon Mitchell and I consider supply chain development from both sides, examining the business case for ‘upgrading’ – the process of adding value and increasing competitiveness by changing the roles participants play and the way they interact with each other.

For convenience and ease of communication we classify ‘upgrading strategies’ according to their purpose and the way they operate. They tend to be implemented sequentially because certain activities are prerequisites for others. For example, ‘horizontal coordination’ – the process of forming closer links among participants within one functional area of the supply chain, such as production or processing, is often a prerequisite for closer buyer-supplier relationships (‘vertical coordination’), offering reduced costs through economies of scale and more efficient joint purchasing and marketing practices, for instance.

In development jargon, ‘horizontal linkages’ are those wider relationships that are the focus of CSR departments and described in concepts such as ‘the triple bottom line’ and ‘shared value’ – that is, social and environmental issues including gender participation, poverty reduction in supplier communities and natural resource management.

‘Functional upgrading’ describes changing the mix of activities performed by a firm. Individuals and organisations can capture value or reduce risk by taking on additional functions, or may ‘outsource’ them to control costs and improve quality through specialisation. Vertical integration (versus vertical coordination described above) is a specialised form of functional upgrading in which a firm takes on functions that were previously performed by suppliers (backward integration) or buyers and distributors (forward integration). Lastly, there are cases of ‘functional downgrading’, in which firms move to lower value activities in order to reduce risk.

‘Inter-chain upgrading’ is the process of using skills developed in one supply chain in another, for example if a producer of traditional local crops switches to high value export horticulture, as has been the case widely in East Africa. More traditionally, the term emerged from manufacturing industries to describe developments such as a circuit board maker moving to produce transistor radios.

The final strategies are paired – ‘process upgrading’ improves processes, both between and within firms, in order to deliver better, higher value products (‘product upgrading’). The drivers for these upgrades may be competitive and economic, if better quality products are rewarded with premium prices or streamlined processes result in cost savings, for instance, or regulatory, where changes are made in order to comply with standards.

Upgrading terminology is not particularly new and, in my opinion, it is not particularly important; it doesn’t matter what we call things so long as we have a shared understanding. Examples of where high profile firms have invested in upgrading of suppliers are numerous and are a practical response to securing the products and services required, at the right time, quality, quantity, price and specification. Now that the development and business agendas are closer than ever, the upgrading concept provides a very useful standard vocabulary for making business better.